Think Palantir Stock Is Too Expensive? Here Are 10 Billion Reasons to Reconsider.

Key Points

• Palantir stock has been on a blistering rally over the past couple of years, sparked by the company's state-of-the-art artificial intelligence (AI) tools.

• The meteoric rise in the stock price has led to an equally mind-boggling rise in its valuation.

• While its multiple can be off-putting, recent developments suggest Palantir's growth spurt will continue.

• 10 stocks we like better than Palantir Technologies ›

The advent of artificial intelligence (AI) in late 2022 marked a paradigm shift in technology. These next-generation algorithms can streamline tasks like never before, create original content, and increase productivity -- saving time and money in the process. Most experts believe it's still early days for the adoption of the technology, but its impact is already being felt across a broad cross-section of processes.

One of the primary beneficiaries of these vast secular tailwinds is Palantir Technologies (NASDAQ: PLTR). The company boasts more than two decades of expertise in data analytics and AI, and quickly developed a cutting-edge generative AI tool that could soon become the company's principal breadwinner.

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Palantir's valuation represents a significant obstacle for some investors, but recent developments help illustrate why the stock isn't nearly as expensive as it might seem.

Image source: Getty Images.

Decades of expertise

Before we address the elephant in the room, it's worth taking a moment to understand how Palantir fits into the expanding AI ecosystem before addressing why the stock's multiple has become so divisive.

Palantir recognized the vast potential of AI and established an early foothold. Thanks to its decades of expertise, the company quickly developed its Artificial Intelligence Platform (AIP). The system consolidates information from various software systems for analysis, helping government and business leaders to make data-driven decisions.

The biggest hurdle to adopting Palantir's software is the lack of expertise and experience among decision-makers necessary to make an informed choice.

To that end, Palantir offered a novel solution in the form of intensive hands-on-keyboard sessions dubbed "boot camps," which last from one to five days. Developers and executives are partnered with Palantir engineers to familiarize themselves with AIP while creating solutions to their real-world business problems.

By providing them with the training and experience they need to address critical business issues, Palantir demonstrates the value of its system and is able to close a growing number of seven-figure deals within just days or weeks after hosting a session. For example, in the second quarter, the number of deals worth $1 million or more doubled, while deals worth $5 million or more increased 5x.

A well-deserved premium

Even bears acknowledge the success of Palantir's strategy. The company reported its second-quarter results after the market close on Monday, and its performance was laudable. Revenue of $1 billion climbed 48% year over year and 14% sequentially. This fueled adjusted earnings per share (EPS) of $0.16, which surged 78%.

To put those results in context, analysts' consensus estimates were calling for revenue of $939 million and adjusted EPS of $0.14, so Palantir blew the doors off expectations.

Those numbers are impressive in their own right, but the devil's in the details. Palantir's U.S. commercial segment, which includes AIP, grew 93% year over year and 20% quarter over quarter, now accounting for nearly 31% of all sales. Furthermore, the segment's customer count grew 64%, and the remaining deal value -- or contractually obligated sales not yet included in revenue -- soared 145%.

The company's accelerating results have driven a blistering run for the stock, which is up 549% over the past year (as of market close on Monday) and has increased more than 1,590% since its IPO in late 2020. The meteoric rise in its stock price has led to a commensurate ballooning of its valuation. Palantir is currently selling for 694 times earnings and 128 times sales, so the stock isn't for the faint of heart.

Yet these results and another recent development help illustrate why some investors are willing to pony up for Palantir stock, despite its lofty price tag.

You get what you pay for

The excitement surrounding generative AI often overshadows Palantir's legacy business of providing AI solutions for the U.S. government and its allies. But the company just scored a major win in its government segment.

Late last week, Palantir signed a major contract with the U.S. Army, worth as much as $10 billion over the next decade, the company's largest contract to date. The agreement "establishes a comprehensive framework for the Army's future software and data needs," according to the press release.

Furthermore, the deal aggregates 75 contracts into a single enterprise deal, which provides purchasing flexibility, "while removing contract and reseller pass-through fees." Perhaps more importantly, it accelerates (emphasis mine), "the delivery of proven commercial software to warfighters."

This announcement comes just weeks after Palantir's Maven Smart System contract with the U.S. Army was expanded to a total project value of $1.3 billion, a new milestone for the company.

Earlier this year, Palantir Technologies stock took a hit when U.S. Secretary of Defense Pete Hegseth ordered the Defense Department to cut existing budgets by 8% each year over the next five years. Investors feared these cuts would eventually trickle down to Palantir. However, as this contract illustrates, Palantir's proven AI solutions continue to be in high demand.

There's no denying the stock's valuation is pricey, but enterprises and businesses are lining up to avail themselves of Palantir's expertise. The accelerating demand suggests Palantir could continue to generate double-digit growth for much of the next decade, according to Wedbush analyst Dan Ives. He further posits that Palantir's market cap, which stood at $378 billion on Monday, will increase by more than 164% to $1 trillion over the next two to three years -- despite the stock's frothy valuation.

Ark Investment Management CEO Cathie Wood goes even further: "CEO Alex Karp believes that [Palantir] will become the largest pure-play enterprise AI software company in the world. I believe him."

Palantir shareholders who have held through the turbulence have already been richly rewarded. For those looking five to 10 years into the future, the runway ahead is long.

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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.